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Edited version of private ruling
Authorisation Number: 1011788872610
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Ruling
Subject: Investments - deduction - interest
Question
Are you entitled to claim a deduction for interest on a loan used to purchase share holdings?
Answer : Yes.
This ruling applies for the following period
Year ended 30 June 2011
Year ended 30 June 2012
Year ended 30 June 2013
Year ended 30 June 2014
The scheme commenced on
1 July 2010
The scheme that is the subject of this ruling
You and your spouse have an existing loan on your house.
The loan is a principal and interest loan.
The house is owned by your spouse and the title is in their name only.
There was an amount owing on the original home loan on the date you drew down an additional amount on the existing loan
You used this amount to purchase shares in public companies that are listed on the Australian Stock Exchange.
You drew down an additional on the loan in the following year.
You used this amount to purchase additional shares in public companies that are listed on the Australian Stock Exchange.
You have since drawn on the loan again to buy additional shares in ASX listed companies you had share holdings of , who were undergoing capital raisings
You sold some of these shares.. This money was deposited into the home loan account.
You pay all loan repayments from your salary.
You are a share investor.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1.
Explanation (This does not form part of the ruling)
Interest is deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) to the extent that it is incurred in gaining or producing assessable income except to the extent that the expense is of a capital, private or domestic nature.
Taxation Ruling 95/25 provides the Commissioner's view regarding the deductibility of interest expenses. It specifies that to determine whether the associated interest expenses are deductible under section 8-1 of the ITAA 1997, it is necessary to examine the purpose of the borrowing and the use to which the borrowed funds are put.
Where a borrowing is used to acquire an income producing asset, the interest on this borrowing is considered to be incurred in the course of producing assessable income.
Taxation Determination TD 93/13 provides that where non-income producing property such as the family home is used as security for a loan to acquire income-producing property, the interest expense is allowable as a deduction.
Mixed purpose loans
In examining the use of borrowings, there may be instances where the loan has a mixed purpose, that is, the borrowed money has been applied for both income producing and non-income producing purposes.
For a mixed purpose loan account, the deductibility of interest is determined by considering the application of borrowed funds for income producing and non-income producing purposes.
Where there is a mixed purpose, you are only entitled to a deduction for the portion of the interest which relates to the income producing purpose.
In your case, you have drawn against the loan of your house to purchase shares. Therefore, you will not be entitled to claim any interest expenses on the balance outstanding on your home loan.
Who incurred the expense
Taxation Ruling TR 2000/2 indicates that ownership of the actual investment determines as to who has derived (and should return) the income and who has incurred (and should claim) the expenses.
Where the ownership records of the investment asset indicates sole ownership of the investment asset, and the borrowed money is in joint names, the legal owner can claim the full amount of the interest paid. Conversely, the legal owner is required to declare 100% of the income produced by the investment asset.
The shares that you purchased with the proceeds of the loan will be solely your property. Your spouse will be said to only be party to the loan due to her ownership of your family home that has been used as security. Also, you have incurred all the expense as you are paying the interest component on the loan from your salary.
Despite the fact that the loan account is held jointly with your spouse, you are able to claim a deduction for 100% of the interest charged on the amount used to acquire the shares as you have incurred the expense, and have derived all the income from the investment of that amount in shares.